Whenever you buy a new home, you will need to put money down. Whether it’s coming from the sale of your current home, your savings or another source, most lenders will require some sort of down payment.
Along with the down payment, your mortgage will include an interest rate. Even just 0.5% can make a big difference when it comes to the total amount you will pay for your home.
Understanding both the down payment and the interest rate will help you as you go through the process of buying a new home. Here are a few things you should know about both.
Larger or Smaller Down Payment?
Just because the mortgage company only requires a certain amount down doesn’t mean you cannot put more down. Your down payment will change the total amount you finance. The more you put down, the lower your mortgage will be.
A larger down payment means you pay less in interest and you start out with some built-in equity. However, a smaller down payment may benefit you, if you simply cannot put more down on your home.
If possible, put 20% of the purchase price down. This will allow you to avoid paying PMI or private mortgage insurance, in most cases.
Is your Down Payment Refundable?
If you decide to back out of the deal, you may or may not get your down payment back. Often, you will put down what is known as “earnest money.” this money is put into an escrow account and released once the deal is finalized.
Your contract may state that this money is non-refundable if you decide to back out. However, you might get it back if the seller chances their mind, it’s written into the contract, a contingency in the contract wasn’t met or a fire occurs at the property.
Fixed or Adjustable Interest Rates?
Choosing between a fixed interest rate and an adjustable one has been a debate for many years. Fixed rates are easy to predict because they never change. However, they are usually higher than the teaser rate associated with adjustable rate mortgages.
An adjustable rate will start as a fixed rate for an introductory period ranging from one year to about ten years. After this period, the interest rate will adjust based on the index chosen by the lender. While an adjustable rate mortgage may look appealing, remember, the rate could go up.
Using Points to Lower your Interest Rate
Your interest rate can be lowered by paying what is known as points. Usually, you will pay 1% of the total mortgage amount to lower your rate by 0.125%. This may help reduce your mortgage payments and the total amount of interest you pay on the property.
If you plan to keep the mortgage for many years, points make plenty of sense. However, if you plan to move within the next 10 years, you may not want to pay for points.
There are several things you will want to understand about both down payments and interest rates. If you have any questions about either one, make sure to discuss your questions with your lender.